Question

Federated Fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $35,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $44,000 when its fair value was expected to be $59,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 10%. (FV of $1, PV of $1, FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease 2. Prepare an amortization schedule that describes the pattern of interest expense for Federated over the lease term. 3. Prepare the appropriate entries for Federated from the beginning of the lease through the end of the lease term.

Answer 1

Year	PV @ 10%	Payment	PV
0	1	$35,000	$35,000
1	0.90909	$35,000	$31,818
2	0.82644	$35,000	$28,925
3	0.75132	$44,000	$33,058
			$128,802
Lease Amortization Table
Date	Payments	Interest	Decrease in Balance	Outstanding Balance
1/1/2021				$128,802
1/1/2021	$36,000	0	$36,000	$92,802
12/31/2021	$36,000	$9,280	$26,720	$66,082
12/31/2022	$36,000	$6,608	$29,392	$36,690
12/31/2023	$45,000	$3,669	$41,331	($4,641)

Date	Account Titles	Debit	Credit
Jan. 01, 2021	Right of use asset	$128,802
	Lease payable		$128,802
Jan. 01, 2021	Lease Payable	$36,000
	Cash		$36,000
Dec. 31, 2021	Lease Payable	$26,720
	Interest expense	$9,280
	Cash		$36,000
Dec. 31, 2021	Amortization expense	$21,467
	Right of use asset		$21,467
	($128,802 ÷ 6 years)
Dec. 31, 2022	Lease Payable	$29,392
	Interest expense	$6,608
	Cash		$36,000
Dec. 31, 2022	Amortization expense	$21,467
	Right of use asset		$21,467
Dec. 31, 2023	Lease Payable	$41,331
	Interest expense	$3,669
	Cash		$45,000
Dec. 31, 2023	Amortization expense	$21,467
	Right of use asset		$21,467